This means that bitcoins will be taxed as “ordinary income or as assets subject to capital gains taxes” under the correct circumstances.

According to the IRS crypto-currencies will not be “treated as legal-tender currency” and the US dollar value of virtual currencies will be subject to taxation on gains and losses just as property transactions are calculated.

The IRS statement reads: “The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. If a taxpayer holds virtual currency as capital – like stocks or bonds or other investment property – gains or losses are realized as capital gains or losses. However, when virtual currency is held as inventory or other property mainly for sale to customers in a trade or business, ordinary gains or losses are generally incurred.”

Bitcoins that are “held by investors” will be treated as though it were “stock or other tangible property. If the virtual currency is held for investment, any gains would be treated as capital gains, meaning they could be subject to lower tax rates.”

Tyson Cross, bitcoin tax expert explains that “users will have to track their transactions and determine the amount of their taxable gain each time. It’s quite a burden. The rules on taxing foreign currency provide an exception for ‘personal transactions’ for that very reason. It would be great to have that exception (or something similar) apply to bitcoins as well.”

In lieu of new rules established by the US Department of Treasury, Cross speculates: “That typically begins with a request for public comments, which was included in the notice. Tax professionals can then identify issues and advocate possible solutions. So between now and the issuance of actual regulations (which takes years), there’s ample opportunity to shape the tax treatment.”

According to Publication 525, Taxable and Nontaxable Income, “a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”

This publication also states that a taxpayer who “mines” virtual currency is then subject to the fair market value of the US dollar at the time of mining which would translate to the date of receipt. This is considered gross income.

As outlined in Publication 551, the Basis of Assets, that virtual currency is subject to “fair market value of the virtual currency in US dollars as of the date of receipt.”

Fair market value of virtual currency is required to be determined in US dollars. Additionally, virtual currency that is listed on the stock exchange must be valued by its ability to be converted to US dollars.

Publication 544 entitled Sales and Other Dispositions of Assets explains how fair market value of property as exchanged with virtual currency is considered a taxable gain to the recipient.

This publication also states that a taxpayer who “mines” virtual currency is then subject to the fair market value of the US dollar at the time of mining which would translate to the date of receipt. This is considered gross income.

Mining virtual currency under a non-employment capacity is considered self-employment and the taxpayer is then subject to taxation based on gross income derived from trades or deductions approved for businesses.

When virtual currency is used to trade for goods or services, the worth of the currency is then reestablished based on the date of receipt by the payor.

Virtual currency is subject to “backup withholding” as are any other tender traded in lieu of payments on property.

Taxpayers may be subject to penalties by the IRS after March 25th of this year because of failure to comply with these new regulations and rules on virtual currency.